The global economy will underwhelm in 2025. Policy-makers may be satisfied with global growth rates around 3%. But they are failing to address fundamental challenges and the global economy is muddling along, a far cry from the 4% and higher average rates in past decades. US President-elect Donald Trump’s trade policies could deal a rude shock to the outlook. Meanwhile, the termites keep feasting away at the global economic foundations.
US growth may ease over the year, but many forecasters still see growth around 2.25%. The irrepressible consumer will help avert a downturn, putting paid again to the hard landing crowd. US economic non-policy remains a mess.
Euro area growth should ‘numerically’ pick up but remain weak, especially in Germany, which may witness a dead cat bounce. However, PIGS (Portugal, Ireland, Greece and Spain) will fly.
Chinese policy-makers are shifting towards cautious monetary and fiscal stimulus, but won’t overcome the economy’s massive structural debt, housing, deflationary and confidence headwinds. In the spring, authorities will post a growth target perhaps of around 5% and they’ll hit it one way or another. India remains somewhat a bright spot.
Japan’s 2025 growth rate will bounce back, supported by wage gains and because 2024 gross domestic product was held down by a sharp first quarter contraction.
Latin American growth remains hampered by longstanding productivity and corruption problems, with Brazil’s financial woes intensifying and US-Mexican relations undermining confidence. Argentina may be the star!
Fragmentation and flailing multilateralism
The major economic strides of the last 80 years were facilitated by America’s hegemonic power and the security structure it offered within which to pursue the liberal order.
But America’s relative global weight has waned and the US turned somewhat inward. After the 2008 financial crisis, the G20 was touted as the premier forum for international economic co-operation. But it then floundered, riven by Russia’s brutality against Ukraine, poor performance in many emerging markets, Trump’s isolationism and bellicosity, and fraying US-China relations.
The US, Europe and Japan reconnected in a revitalised, cohesive G7 on issues such as financial sanctions, cybercrime, anti-money laundering and helping Ukraine against Russia. But that unity too is likely to fray as Trump 2.0 injects uncertainty and volatility.
Liberal trade and investment are under siege
The Joe Biden administration was little different than a revanchist Trump 1.0. Now, Trump 2.0 threatens 25% tariffs on Mexico and China – America’s two largest trading partners – while across the board tariffs of 10% to 20% would batter Europe and 60% China. If implemented, a massive hit to global growth will be delivered. Some suggest the tariff threats are merely a negotiating tactic for unspecified concessions. Who knows?
Protecting national security is essential. But much is simply protectionism. Is America truly afraid that Chinese solar panels and electric vehicles will undermine national security? Is a mothballed steel plant and lost jobs better than one owned by a firm from the country of a close ally that protects jobs?
Decoupling continues amid growing US-China tensions
Everybody in the US is a China hawk. The only question is how big the talons are. The US is possibly on the verge of banning TikTok, further cutting off less-than-advanced chips, adding more firms to the entity list, on top of tariffs.
President Xi Jinping will stand up to Trump and China will retaliate. US levers on China are not as strong as under Trump 1.0. But China is not doing itself any favours in the West’s eyes by embracing President Vladimir Putin, looking indifferently on Russia’s war against Ukraine and fomenting hostility in the South China Sea.
Europe remains weak and divided
Trump is dismissive of Europe, America’s staunchest ally. The French government remains stalemated. No matter who runs Germany, economic policy is hamstrung and the country’s growth model broken. Surprisingly, Italy is Europe’s island of stability in a stormy sea.
Skirmishing between European Union member states and Brussels will continue. A divided Europe disdainful of Trump 2.0 won’t formulate a coherent response.
Poor macroeconomic policy, squeezed real incomes undermine public trust
Inflation is down but productivity growth languishes, squeezing real incomes and bolstering insecurity and populism.
Public debt is high in the US, much of Europe, Japan and China. In the US, the fiscal trajectory is unsustainable. Trump is likely to boost deficits from the already absurdly high level of 7% of GDP, pushing up longer-term rates, hurting investment and causing market indigestion. Will bond vigilantes return?
European high-debt countries will seek to restrain deficits, and Germany won’t pursue major workarounds from its rigid debt brake. Structural reform will continue to flag as policy-makers are wary of political fallout from adjustment costs.
China has some fiscal space at the centre, but is cautious in using it, let alone helping consumers rather than overhauling its inefficient investment and export-led growth model.
At some point, the fiscal chickens and unwillingness to revamp growth models will come home to roost. Further real income squeezes are likely and huge bouts of market volatility may be a sign of more trouble.
The 2025 global economy will underwhelm. America’s relative economic and political weight is still strong, but waning. Across the world, political fragmentation, hits to globalisation, uncertainty, flailing multilateralism, poor economic policy and mediocre leadership will accelerate the weakening of the global fabric. There are many culprits, but the US is at the heart of this own goal.
Mark Sobel is US Chair of OMFIF.
